Responsibility Accounting

In responsibility accounting, costs are identified with those individuals who are responsible for their control. In determining costs controllable by a given manager, it is necessary to analyze each cost element separately. All variable costs cannot be assumed to be controllable, nor al fixed costs uncontrollable. The authority of the person being considered must be recognized; thus responsibility accounting classification must fit the organization structure. Furthermore, a minimum of cost allocation should be employed; that is, consideration should be given only to those costs that are clearly influenced by a particular individual.

Closely related to the concept of responsibility accounting is the idea of profit centers. Here the concern is to assign responsibility for both revenue and expenses to a business. The establishment of profit centers requires the allocation of costs, revenues, and assets in order to evaluate the performance of a segment manger.

A general purpose control involves a manager and subordinate agreeing on objectives for the subordinate (the predetermined standard) recording the success in actual performance, and then at a review meeting between the two, comparing the agreed on objectives with actual performance. The manager then has a number of options for handling any variances. This approach suggested by Peter Drucker and popularized by George Odiorne is management by objectives (MBO).

In MBO, an executive must narrow the range of attention of each person in the organization to focus on definite and measurable results that have a clear meaning for each individual. Each part of an organization can contribute toward companywide objectives if it clearly sees its own specific goals and can determine, through measurement, how well it is doing. The selection of the proper factors to be measured is an important decision, because usually that which is measured is that which receives attention.

The key to MBO is the mutual relationships between the superior and the subordinate in setting realistic objectives for the subordinate. The superior and the subordinate meeting should establish objectives in three major categories; routine objectives, problem solving objectives, and innovative. For each of these categories, agreement should be reached for three levels of achievement: pessimistic (absolute minimum), realistic (normally expected), and optimistic (ideal). In the last decade many organizations have developed elaborate processes for MBO, with varying degrees of success. However the basic idea of MBO is fundamental clear targets should be set by superior and subordinate at all levels of the organization.

The overall objectives of a firm generally are established by top management; yet it is desirable for each subordinate manger to have a voice in setting his own objectives. If each manger is to understand the relationship of his own organizational objectives to the broader objectives of the company, he will need to participate in the goal setting process. If he is involved in establishing his objectives, he will feel that the objectives are proper once they are set and will tend to accept them more readily. In this way each part of the organization will strive in a joint effort towards the recognized organizational objectives.

Objectives may be set as ideals or as realistic expectations. Whether the objective is idealistic or realistic, it should be stated in definite terms of results. The statement “reduce costs” sounds fine, but it is vague and lacks precision. Even if a manager is conscientious and sincerely strives toward this vague objective, he never knows whether he has reached “the objective”. The statement “produce at cost 10% less than last year” is better because it states the specific results desired.

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